The following transcript is from the January 6, 2015 edition of CRI's program People In the Know, in which CRI's Liu Kun spoke to Cheng Li, Director and Senior Fellow at the John L. Thornton China Center, The Brookings Institution in the US, and David Shambaugh, Professor of Political Science and International Affairs at the George Washington University in the US.

Liu: Mr. Li, welcome to the show. China and the US have established diplomatic ties since 1979, and you started your study in America in 1985. According to you, how different the China-US relations are now from how it was in the early 1980s?

Li: well, it is quite different because the cold war was not over at that time and China was not perceived as a major competitor. And China just opened with Deng Xiaoping's open policy. I was among the first group of Chinese who benefit the education exchange. So experiencing the tremendous enthusiasm and interests and friendship during my first few years in United States. So that was a good time.

Liu: So I guess both China and the US have worked a long way from 1980s until now and what lessons and experiences have both sides learned from the 35 years?

Li: I wish we could learn more lessons from the mistakes, and I think the real lesson is that sometimes perception or misperceptions dominate our thinking that mutual reinforced fears which could be quite dangerous, but again this is what I said that the real said problem is that we do not learn much lessons from history. This just reminds me that Ronald Reagan visited the Soviet Union, I think in the middle 1980s. Then when he came back, he had a press conference. He told American people he said he found that Russians, they smile, they laugh, they cry, they are human beings. But that's a one journalist from the White House - Helen Thomas. She asked: Mr. President, suppose you visited the Soviet Union in 1960s or 1970s, you probably will find that Russian people, they smile, they laugh, they cry. They are human beings. Then Ronald Reagan said: no, they changed. This tells us about how mutually reinforced fear dominates our thinking. And try to see others in the eyes that really did not exist.

Liu: In one of your blogs posted on the Brooking website, you wrote about your recent trip to the summer in China, and you wrote that while many in China presume that the United States is not ready to accept China's rise, the surprising reality is that majority of Americans believe that China is already the world's largest economy, so how do you view the current US-China economic relations?

Li: This actually is not only based on my observation, but also based on our service's. Service ask, you know, what do you think? Which country has the largest economy, the No. 1 economy? Actually most people in the United States answer it's not the United States but China. So that reflects that kind of view. Because it's important. Because most Chinese think that China's rise makes a lot of people in the United States unhappy, which has some true reason, but on the other hand, I think it's largely wrong. Because if that's happening, it's already reality. You cannot change too much. For most Americans when they talk about this dramatic rise and fall of great powers, those intellectuals, and those actually middle-class Americans, actually will say that China's rise actually reflects that they are doing something right, we are doing something wrong. So they will try to criticize some of the things in the United States. For example, no saving, over-spending, and the self-indulging, etc. So again, that statistic finding by service actually is quiet revealing. But in China, people always perceive that because the United States wants to contain China, to stop the economic rise. But the reality is I think the United States and China are the two countries probably benefitting the most from economic globalization than any other countries in the world. Because the trade opening and economic integration really benefit Chinese economy and also benefit the United States who maintain a leader in the world.

Liu: After Xi Jinping came into office, China has initiated a number of new international mechanisms and several of them are considered as competitive to the mechanism that the US already led like the free trade agreement of Asia Pacific is considered being a counterpart of PPP and also the BRICS development bank and the AIIB are considered to be competitive to the world bank. So how do you view the competitions and tensions between the two countries in terms of the world order and leadership?

Li: Well I want to answer that question in two different aspects. First, you simply cannot foresee a world in all international organization, international integration without the United States, without China. Any effort to exclude one of them is self-defeating and self-deceiving. Secondly, in terms of AIIB, I think it's also quite interesting that because the current international organization with the World Bank and Asian Development Bank are really not doing great because they've become very bureaucratic, not effective not so much money spent on infrastructure. Now they are doing some good things like poverty release and etc, or public health, but in terms of infrastructure development, even after the Chinese village head. They will tell you, start with building a road, then the village can benefit. This is a common sense. But look at World Bank and ADB: they are not doing too much on infrastructure. Now China wants to establish AIIB. So what's wrong with it? You cannot do it, but you ask other people not to do it. So that self, in my view, is quite bizarre. So I think that the United States needs to adjust that reality. But at the same time I think that any international institution should be more inclusive rather than exclusive, and should really serve the world, so that's important. Otherwise the international integration, the international institution really do not serve that purpose and that kind of institution actually not in line with what the world needs.

Liu: China at this year's APEC has strongly promoted the FTAAP, but the US is not a big fan of that and what do you see in the future of FTAAP and TPP in generally the Asia area?

Li: I think that both the United States and China and many other countries in the world should really change that perception. I think we should participate in a similar or different international economic institution but none of these international integrations should have the aim to exclude others. Rather it should be broad enough to exclude any partner can follow, work in line with other international institution. At the same time I think that the United States and China should really take the leadership role to facilitate the global economic integration rather than get caught a kind of trade war and only try to, you know, have a narrow interest that only several countries can benefit rather than the international community at large.

Liu: Last year you wrote about China's rising middle class, an important force and it cannot be neglected in the shaping of China's future political and economic landscape. So do you think this large block of people will have any impact on US-China relations, and if yes, what impact will we see?

Li: We will see China is a normal country; it's very like many middle class countries such as the United States, such as South Korea, Japan, Germany, etc. And these middle class will come with the similar middle class consumption which will contribute to the global economy, which contributes to China's continuing or the sustainability of China's economic growth. And the middle class also eventually want to have a political demand when you come to protect middle class interests. So I'm confident that China's middle class will gradually contribute to China's own political development. So my point is that the middle class will contribute to China in a profound way. Will consumption, environmental protection, food safetyˇ­ name it, all these issues. And contribute to China's urbanization, reduce economic disparity. So it's the race between economic disparity and more equal middle class country. So I think that if China can expand its middle class, the Chinese economy should be much more healthy. So that will contribute to China's social-political development as well, and also contribute to global economic prosperity and also peace.

Liu: So how do you define US-China relationship?

Li: It's a new type of international order. So in a way the world is in the midst of a major transformation. You do see geopolitical, geoeconomic change, transformation. You see the rise of BRICS; you see the rise of Asia; you see the rise of South America. But at the same time there's a tremendous opportunity to have the international economic integration, which benefits the entire world, but you also see the tensions. You see that some of the areas for the most important economic break throughˇ­ actually the public will only benefit a small amount of people rather than the large number of people. So therefore I think the key word is governance. It's the global governance to deal with the common challenges. And challenges could be the environment, could be cyber-security, could be economic disparity or public health crisis, etc. So I think it's important to know in the 21st century world we should get rid of the 19th century mindset of a cold war mentality. So I think that's crucial. I think that the United States and China for all reasons should work together. You cannot see a kind of scenario that one country is doing very well, the other country is going to have disaster. So Larry Summer said that you can see both China and the United States doing well or neither country doing well. But one country doing well one country doing badly is not a scenario we will see. So that tells us that the United States and China should cooperate with each other in all aspects. And because with the status of major power, with the leadership role, you also come with the responsibility and a contribution to the international economic integration and to help more countries, more people to have a middle class life style.

Liu: In one of your comments published on Brooking's website, you said the US-China relationship has exhibited both elements of cooperation and competition. But it's been 35 years as we have talked about, and what lessons and experiences have both sides learned from the 35 years?

David Shambaugh: Well, I think both sides have learned that is very complex and complicated marriage you might say, and it's a marriage in which divorce is not an option. We have to work together when we can and we have to manage our differences. And after 35 years, I think we have learned pretty well to manage our differences, at least to keep them from becoming more adversarial.

You know we have learned a few other issues, I would say. We have learned how to manage the Taiwan issue. At least the American side I think has become adjusted to the sensitivity of Taiwan issue for China. We've learned to work together in certain limited areas of global governance and I think we are learning that we can share the Pacific Ocean. I'm not sure though. There are a lot strategic competition in East Asia and between not just the United States and China but a number of other countries and China as well. But over the years we've learned each other's sensitivities and, you know, how to work together I think in diplomatic ways. We've also learned economic and commerce and people to people exchanges, I think. We've worked really hard to expand contacts between our two societies on all levels. For example, there are 300 thousand Chinese students in American universities. There are increasing numbers of Chinese tourists coming to the United States, increasing numbers of businessmen and investment from China into the United States. And all kinds of interactions from mayors, governor levels... So the people to people mention is really foundation of the relationship. That's the strength of relationship.

Liu: Talking about people to people and business to business exchanges, I think there are now quite a few Chinese organizations, agencies like big companies and also maybe the Confucius Institute that are based in the US. So how do you see their performance over there in the United States?

David Shambaugh: First of all, you are right. There are more than 200 Confucius Institutes in the United States today and my personal view is that they are quite good and doing what they should be doing, which is teaching Chinese language and culture to Americans, particularly at the high school secondary level, but also at universities. But it has to be said that there's perhaps an overreaction in the American media and several American universities have now discontinued their contracts with the Hanban. So Confucius Institutes have actually become another kind of sensitive issue in the relationship. You ask about Chinese business in America. Chinese businesses are quite frustrated, I think. Trying to invest in the United States, there are a number of laws and regulations that they encounter in the US that they don't encounter in other countries. And they're beginning to learn to navigate those laws in fact a little bit better. And the direct investment is increasing quiet rapidly. In fact in virtually every state of the United States and I expect that going to go up now that the Chinese are learning a little bit about the difficulties of doing business in the United States.

Liu: I guess so. I want to go a little bit deeper on the business issue. What kind of contribution do you think local employees are doing to Chinese agencies based in the United States?

David Shambaugh: Well, look at how Chinese companies operate overseas in the last two or three years under the "Zou Chu Qu" go out policy, they've tended not to hire foreign nationals in their operation. This is a rather new development and it's a good development.

In fact, most levels of Chinese multinational corporations find that Human Resources, HR, is the greatest weakness of Chinese companies that China operates abroad. So this recent development you point to hiring foreign nationals... I think it's a good step forward. It's what all foreign national companies do, to hire foreign expert to help. And China's traditionally not done that. But is not beginning to and I think that's going to help their competitiveness in the US and other countries.

Liu: In one of your recent papers published also on Brookings website, you wrote about the meeting between Obama and Xi Jinping in Beijing in November. You said while the two sides did not issue a lengthy joint statement detailing the two sides' respective positions and on dozens of national issues, this time it was determined to be more modest but practical in their aspirations and achievements. Why do you think there has been such a change?

David Shambaugh: Well, it's pretty clear talking with officials in both governments. I've talked with officials in the White House, who manage the American side of the summit, and I've talked with Yang Jiechi and others who managed the Chinese side of the summit, and both sides recognize that previous summits had issued these long joint statements, 60 or 70 different elements to it. And the problem is that they were overly aspirational should we say.

And they were not implemented. So this time it was decided to pick 3 or 4 really key central issues in which progress could be made: a climate change agreement, the information technology agreement, and the two military confidence building agreements. And those were agreed to by both sides and they're fairly positive and tangible and achievable. There are a number of other areas that the two presidents talked about. 27 different areas in fact, and that ranges from working together to combat the Ebola health pandemic in West Africa to antipiracy operations in the Gulf of Aden, and a variety of other issues. So they discussed a lot, they achieved a lot and we really need to build on that momentum going forward into the new year.

Liu: I think a lot of people have been observing this since Xi Jinping came into office. China has initiated a number of new international mechanisms. And several of them are seen as competitive to the initiatives that the US has already led. So how do you view the competition and tensions between the two countries and world orders and leadership?

David Shambaugh: Well there is a difference in the two countries' views about world order and international institutions. The United States very much believes in the liberal institutions that have resisted since the Second World War. We're seeing China begin to set up its own institutions such as the BRICS Development Bank and the Asian Infrastructure Investment Bank. But I'll also note that the Shanghai Cooperation Organization, the Reform on China-Africa Cooperation, the China-Arab Cooperation Reform, and a number of others. And these are somewhat competitive with the post-war liberal order that the United States has been so central in creating. And I'm not sure that they're a bad thing myself. I think that there's a lot of room for many levels, you might say, of global governance, and different architectures and different institutions. There's a lot of development that needs to take place in the world. The World Bank and the Asian Development Bank and the IMF can't do it all. So I myself and a number of other Americans and other observers don't actually see these new Chinese initiatives are necessarily a bad thing, but complementary rather than competitive. But they're not really implemented yet. They've been created and funded and we're going to have to wait and see and how they play out in the next few years.

Liu: We have talked so much about the lessons and experiences over the 35 years. How to define a good or healthy US-China relationship?

David Shambaugh: Well, I don't think we should have any illusions about the difficulties of the US-China relationship and what we disagree on. The United States and China disagree on a whole lot of things and we cannot just pretend that those differences don't exist. What we have to do is trying and managing those differences and keeps them from bleeding into a more full adversarial relationship, becoming more fully adversarial. That's the first big challenge. How to manage strategic differences, trade differences, ideological, cultural, soft power differences, diplomatic differences, world order differences, and to build on the areas of cooperation that we do have in place. I think, again we go back to people-people level, and all the interactions between our two societies. That's the real foundation of the relationship. So it's a mixture for an intrinsic to the nature of rising power, established power, the differences in our political systems, our competing geoeconomic and even geostrategic interests in the western pacific. So that doesn't mean we can't cooperate together very practically in various areas. In fact both countries' interests. That's what we've been doing since President Nixon, Chairman Mao, and Zhou Enlai in Zhongnanhai in 1972. But we're into a new stage of relations now. And China's the second leading power in the world. China has its own interests in Asia and in the world. Those interests are not always congruent with American interests and vice versa. So it's natural. It's the new normal. We should expect it. It's not unusual that these two countries are going to clash. I think we really need to do is to learn how to manage those differences and to really expand its own cooperation.

And I think President Xi Jinping's recent speech to the foreign affair work conference, for example, is very encouraging. Because he suggested that China is going to have a more activist foreign policy, activist diplomacy. That's good. That means that China is going to contribute more to global governance he said and that's exactly what the United States and the European Union and many other countries have been calling on China to do for several years is to contribute proportionally to its capabilities to global governance. We have to give back to the international system. And I think that China's leaders have now begun to recognize this.

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